China's remarkable reform manifesto

First, expect a new wave of Chinese infrastructure investment and likely sharp increase in household consumption. What follows that could be the biggest shift in the country’s communist history.

So China’s President, Xi Jinping, has now released the real communiqué. The first one, it turns out, was just a 3500-word preamble; the second one is the real one and contains a remarkable set of specific measures that suggest China is indeed entering a new era of reform.

It is a bit like the Fightback! reform manifesto that sank the Coalition at the 1993 election, except this one doesn’t have to be voted on: the 'vote' happened behind closed doors at the Third Plenary of the 18th Communist Party Congress last week.

The new document has the title “Decision on Major Issues Concerning Comprehensively Deepening Reforms” and lists 60 specific reforms. Three of them jump out:

-- The “hukou” system of household registration is to be relaxed;

-- The one-child policy is to be relaxed;

-- State Owned Enterprises will be required to pay 30 per cent dividends into a Social Security Fund.

There are plenty more, including opening up the movement of capital, scrapping the “re-education through labour” system and even looking at introducing an intellectual property court, but to me those three stand out.

A 'hukou' is a family’s record of registration and the system goes back thousands of years. They were originally used for taxation, conscription and social control generally, but when the communists came to power in 1949 the system was used to prevent a rural exodus into the cities.

Each person was registered as 'rural' or 'urban' and lost the right of free movement within their own country. It created, in effect, two classes of Chinese: the urban classes who got to work for cash in the industrial sector and had access to social welfare and state services, and the peasants who were tied to the land to produce the food and who were basically on their own.

The system hasn’t stopped internal migration, it’s just that the rural classes don’t have access to welfare or services in the cities. There may be as many as 200 million or more people in this grim situation – rather like America’s illegal Mexican workers in their own country.

The new communiqué says the hukou system will be scrapped for small cities, “relaxed in an orderly manner” for medium-cities and retained for large cities to control their size, while introducing new rules to “facilitate” the settlement of migrants, whatever that means.

The reason this is important for Australia is that there will have to be a massive new wave of investment in infrastructure in smaller cities to service all of the people, rather than just those who are registered to be there.

ANZ Bank’s chief China economist, Li-Gang Liu says that in addition to housing and transport, there will be an investment boom in public schools, hospitals and other public services in China’s Tier 2, 3 and 4 cities.

The new rules don’t scrap the one-child policy – parents from single-child families will be allowed to have two children.

The one-child policy was first introduced in 1979, so the first children born to mandated, single-child families are now 34 – childbearing age. It means there could be a new baby boom in China as young families have a second child fast before the rules change again.

The result could be a sharp increase in household consumption in China (Making sense of China's baby talkNovember 18).

Forcing SOEs to disgorge more of their cash for social welfare will also result in increased consumption.

One of the big problems in China is the fact that business profits are not distributed, either to the central government or individuals. The result is an unbalanced economy with too much business investment and too little social welfare.

However the wording of this reform makes it very unclear whether they are talking about actual dividends: “… increase the proportion of State capital gains paid in public financing to 30 per cent by 2020, which will be used to ensure and improve people's livelihoods.”

Beyond that, the new manifesto lays out fiscal and taxation reforms designed to broaden the local governments’ sources of income and improve their liquidity.

There’s also a set of banking and financial reforms that accelerate yuan convertibility, open up the capital account, further liberalise interest rates and allow the Treasury yield curve to better reflect demand and supply.

The document also specifically refers to the proposed Shanghai Free Trade Zone as a prototype for even deeper reforms, including floating deposit rates and full convertibility of the yuan.

If all of these reforms actually come off, the 2013 Third Plenary will be more significant than the one in 1978, at which Deng Xiaoping launched China on its path to modernisation in the first place.

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